Legal Lemons, PR Lemonade

Mike Hofman was previously editor of Inc.com and a deputy editor at Inc. magazine, which he joined in 1996. The site was nominated for a National Magazine Award for Digital Media in 2010, and was named the best business website by Folio Magazine. In 2006, Hofman was part of a team of writers nominated for a Webby Award for best business blog. He lives in New York City.

Tom Szaky knew that March 6 was going to be a big day for TerraCycle. His Trenton, New Jersey-based company was close to securing $2 million in private equity. In a few short years, TerraCycle had managed to get its organic plant food product (made from worm castings, which is to say, poop) on the shelves in Wal-Mart and Home Depot. Now, just at the start of the lawn care industry's busy spring season, Szaky had struck a deal with JH Partners, a California fund that has backed such fast-rising ventures as Peet's Coffee & Tea and Design Within Reach. But instead of a final term sheet--or, better yet, a check--what ultimately landed on Szaky's desk was a 173-page lawsuit. And it wasn't just any lawsuit: TerraCycle was being sued by Scotts Miracle-Gro, its largest competitor, for false advertising and trade dress violations. Specifically, Scotts said that TerraCycle, which Szaky has called "the anti-Miracle-Gro," had falsely claimed that its product "outgrows the leading synthetic fertilizer." The packaging for one of TerraCycle's products--a yellow and green bottle with a yellow spray nozzle--was another point of contention. Scotts felt the resemblance to its registered trade dress was unacceptable. "How the hell do I fight this?" Szaky recalls thinking as he read the complaint.

Talking smack about a larger rival is, of course, a time-honored business tactic. But as TerraCycle's situation illustrates, one of the often overlooked risks of the strategy is that, when provoked, big companies can bite back--and bite hard. Indeed, getting stuck in a legal battle with a huge conglomerate is an entrepreneur's worst nightmare. Litigation can easily cost between $750,000 and $1 million and can last a year or more, says Ira J. Levy, a partner who practices intellectual property law in the New York City office of Goodwin Procter (and who is not involved in this case). Moreover, a major lawsuit can cripple a fledgling company operationally.

After digesting Scotts' filing, Szaky mulled his options. Obviously, he had to disclose the suit to his prospective investors, possibly killing the deal. But then what? "I knew there was no way I could outlawyer Scotts," Szaky says, "so as I thought about it, I wondered what core competency our company had that we could exploit. Guerrilla marketing seemed to be the obvious answer."

So Szaky went on the PR offensive. To drum up interest in the suit, he launched SuedByScotts.com, a rabble-rousing website that paints the conflict in David and Goliath terms. In addition to court filings, the site takes personal jabs at Scotts CEO James Hagedorn, listing his salary and remarking on his use of Scotts' corporate jet. (A portion of the website is shown at left.) Szaky's efforts paid off. The Wall Street Journal and Advertising Age published articles on the lawsuit.

For a giant like Scotts to accuse a relative pip-squeak of "unfair competition" may seem a little absurd. But executives at the Marysville, Ohio, company say they are simply protecting a venerable brand. "Any claims about our product's effectiveness--we take them very seriously," says Su Lok, a Scotts spokesperson. "I think anyone who is starting and growing a company would understand. It's common sense, Business 101."

Szaky believes that Scotts is more interested in crippling TerraCycle than it is in protecting its trade dress. Of course, Szaky could benefit from creating that impression. "It's a PR judo move," says Robert H. Bork Jr., a litigation communications consultant in McLean, Virginia. "TerraCycle's corporate persona is that of the rebel, so taking on Scotts in this way appeals to their customer base."

It's not an unheard of tactic. In 1984, for example, Ben & Jerry's turned a distribution squabble with Pillsbury's Häagen-Dazs division into a marketing bonanza based around the advertising slogan "What's the Doughboy afraid of?" After the campaign, Ben & Jerry's sales grew rapidly.

Levy also wonders if TerraCycle is biding its time. "One of the fears that my large company clients have is that, by pursuing a trade dress case, they can allow a small player to promote itself on the national stage," he says. "When word gets out that the megaconglomerate is suing the little guy, you risk having bloggers launching boycotts, and the plaintiff ends up injuring its own business."

Szaky admits that his vocal indignation is partly organic but also partly synthetic. The lawsuit is a threat, sure, but it's also an opportunity to generate buzz and to stoke a fighting spirit among his staff. "It's like The Art of War," he says. "You need to have a villain to be up against, and for us, that's Scotts." As for the investors, the suit didn't scare them. TerraCycle closed the round on schedule.